Marital versus Nonmarital Property: The Law and Application in a Mediated Divorce Settlement

In mediation, I work with parties to help them classify their property as marital, nonmarital or hybrid (some of each) property. This is important because, in Virginia, judges are only allowed to order the division and distribution of marital property (and that portion of hybrid property that is marital). Nonmarital property, on the other hand, stays with the party who owns it — at least that is the rule when a divorce case goes to the judge.

In mediation, parties may or may not choose to follow these rules. Unlike judges, parties who settle without court intervention are free to divide and distribute their property however they see fit. In my mediations, however, I make sure that the parties at least understand the rules before they decide on another way of doing things. Just like a good English teacher will tell you: “It’s best to know the rules before you break them!” This is all part of the mediator’s role in ensuring that the parties make informed and thoughtful decisions based on both their unique set of circumstances and a comparison of how they might fare in litigation.

The type of property that is classified, divided and distributed, upon divorce, includes everything – even the kitchen sink . . . and the dog. The most common types of property that are the subject of a divorce settlement include:

Property that is classified as marital includes all property acquired by the parties during the marriage. In Virginia, “during the marriage” is defined as: The date of marriage through the date of separation (the date upon which the parties began living separate and apart, and at which time at least one of the parties intended the separation to be permanent). Please note, however, that the durational criteria, in many other jurisdictions outside of Virginia, for classifying property as “marital”, extends to the date of divorce (not just separation). It is not uncommon, therefore, for mediation client to choose the date of divorce, as is done so many places outside of Virginia, as the “dividing line” at which property acquired becomes nonmarital.

Property that is classified as nonmarital consists, for the most part, of property acquired by either party:

a) prior to the marriage;

b) acquired by gift or inheritance from a third party to one of the spouses, individually (not as a gift to the couple); or

c) after the date of separation.

When determining whether a particular set of rules, with regard to the classification, division, and distribution of property, upon divorce, should or should not be applied in a divorce case, most parties will want to consider the following:

the totality of their financial circumstances;

the history of their family’s finances and any understandings that the parties may have had (implicitly, by action/inaction, and explicitly);

the potential effect that differing settlement decisions and proposals may have on other areas of their case (e.g. creating “bad will”, creating “good will”, feeding agitation, encouraging generosity in other areas, etc);

the parties’ relative earning power (even though this is not one of the statutory factors to necessarily be considered by a court[1]);

emotional attachment to property, such as a closely held business or valuable artwork and antiques (this is usually only up for consideration when there is a fair exchange for other property for which there is not such a strong emotional attachment)

Below are more rules, by way of example, that demonstrate how Virginia courts go about classifying property as marital, nonmarital, or hybrid property.

EXAMPLE #1:Husband has $50,000, all earned prior to the marriage, in an investment account in his name. When he marries Wife, the two of them open up a joint bank account which they agree is to be the start of their “marital nest egg”, but there is no solid proof of this oral agreement. Husband then removes $25,000 of his premarital money, from his individual investment account, and puts it into the new joint bank account.

RESULT: The court would probably consider the $25,000 in the joint bank account to be marital property by virtue of the doctrine of “transmutation”. However, to the extent that $25,000 is retraceable to it’s origins as non marital property, and Husband can prove by a preponderance of the evidence that is was not a gift to the marriage (not as difficult, in Virginia, as one might expect), that $25,000 may end up being returned to Husband as his nonmarital property. (VA Code §20-107.3 (A)(3)(f) & (g) & (h)

EXAMPLE #2: Husband and Wife own a joint money market account, opened during the marriage, into which they each contribute money on a monthly basis. Wife inherits, in her own name, $10,000 (inherited money is nonmarital). At that time, the balance in the parties’ joint money market account is $5,000. Wife deposits her $10,000 inheritance into the joint money market, thereby commingling (a legal term) her nonmarital property with her and Husband’s marital property.

RESULT: The court would probably consider all $15,000 in the joint money market account to be marital property by virtue of the doctrine of “transmutation”. However, just like in Example #1, above, to the extent that the $10,000 inheritance is retraceable to it’s origins as non marital property, and Wife can prove by a preponderance of the evidence that is was not a gift to the marriage that $10,000 may end up being returned to Wife as her nonmarital property. (VA Code §20-107.3 (A)(3)).

EXAMPLE #3: Wife owns a home, in her name alone, prior to the parties’ marriage. After the parties are married, Husband puts in a new bathroom, with his own hands, a new tile floor in the kitchen, and wallpapers the large family room and foyer. The house remains titled in Wife’s name. The parties get a divorce and the husband seeks a portion of the value of the wife’s home. Husband’s theory is that the home (or at least a percentage of the home) has been transmuted to marital property by virtue of his labor.

RESULT: The court may or may not consider Husband’s theory to be be a winning argument depending on three factors: (1) Did the husband’s personal efforts contribute, directly, to an increase in value of the home?; (2) Were the husband’s personal efforts significant; and (3) Did the husband’s efforts result in substantial appreciation of the home? (VA Code §20-107.3(A)(1)). This area of the law is incredibly subjective and very expensive to litigate. This is where “it depends . . . “ is an attorney’s favorite phrase.

EXAMPLE #4: Husband has an online stock account when the parties get married, with an approximate value of $100,000 on their wedding day. Husband spends, from that day forward, during their marriage, approximately 2 hours per week managing his stock portfolio. It remains titled in his individual name. No other money is put into that account during the marriage. All assets traded emanate from Husband’s original (nonmarital) assets. Over the course of the marriage, the $100,000 grows to $300,000. The wife claims, in divorce court that, since the increase in value ($200,000) occurred during the marriage, that increase is marital property.

RESULT: Once again, it depends. The increase in value of nonmarital property, during the marriage, is not usually considered marital property. However, if the court finds the increase from $100,000 to be substantial (which it probably would) and find the husband’s 2 hours per week managing the stock portfolio to have been a significant amount of effort (which it may or may not), it may consider all $200,000 as marital funds, to be divided and distributed upon divorce. (VA Code §20-107.3(A)(1)-(3))

EXAMPLE #5: Husband and Wife marry while husband is on active duty in the U.S. Military. Husband came into the marriage with a piece of land that he purchased and fully paid for years before he even met Wife. Husband receives news that he is being deployed to a very dangerous area of the world and he is a bit nervous because he does not have a will and he wants to be sure that there is no probate trouble in case he should die while overseas. In an effort to protect Wife’s financial interests, he quickly adds her name to the deed and goes off to battle. Husband doesn’t die, but instead is greeted by Wife upon his return, with divorce papers. Wife says that the husband put the land into joint tenancy because he loved her and wanted to share everything he had with her, just as they had done with everything else that they owned. Is that jointly titled land now considered marital property?

RESULT: Probably not, if Husband can prove that he put the land into joint tenancy for estate planning purposes only and that he did not intend to make a gift to the marriage of that land. It would be a matter of proof and a judge’s final determination as to which party was telling the truth. (VA Code §20-107.3(A)(1)-(3))/

As you can see, the law is very subjective in this area. This is why clients, in mediation, often do just as good a job at determining whether property should be classified as marital, nonmarital or hybrid property, as do judges. They know their own history and what was said, implied, reasoned, and what makes sense considering their family financial history and culture. They know each other and they know what their hopes and dreams are – or at least what they were before the divorce — for their children and for each other’s future as they get older. Attorneys’ fees can sky rocket in this area of the law, as you can imagine, because “donative intent” necessary to show when, in fact, a contribution of nonmarital property to marital property is present is a very tricky area of the law. It involves defining phrases, such as “substantial effort”, and “significant”, which are hardly quantifiable and, instead, rely on subjective standards and skilled gamesmanship in the courtroom.

[1] For a complete listing of the statutory factors that all Virginia judges must consider when dividing and distributing property upon divorce, see my previous blog article What Virginia Divorce Courts Consider When Dividing Property & Debt (10/13/12))

Posted by Robin Graine, JD, Virginia Supreme Court Certified Mediator

This blog and its materials have been prepared by Graine Mediation for informational purposes only and are not intended to be, are not, and should not be regarded as, legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.